When a property changes hands, the closing process can bring lots of buried issues to the surface. In fact, one in three homes need to resolve an issue before the title is “clear” and ready for sale.
Unlike most types of insurance, title insurance covers past problems rather than future accidents. Title insurance provides coverage against problems like legal claims or record-keeping mistakes that add time and cost to closing a sale on a home.
There are two types of title insurance. A loan policy only protects the lender’s interests. Almost all lenders will require you to buy this. An owner’s policy covers the buyer against costs like back property taxes that could come with the house. An owner’s policy is optional, but without one, you’d be financially responsible for resolving unexpected title issues that come up.
Before the title insurance company issues a policy, they’ll run a title search. A title search goes through public records to look for signs of significant problems like these:
Essentially, before a sale can go through, you need to make sure the title is “clean,” meaning the seller owns the property and has full rights to sell it.
The initial title search can identify some problems, but not every issue always appears on public record. Here are some complications title insurance can cover.
In cities where home prices are rapidly climbing, such as Philadelphia, there’s been an uptick in scammers illegally acquiring ownership of homes and then flipping them for a quick profit. This puts the people who purchased these homes at a significant risk, because they are essentially paying for a property that they don’t actually own. The seller’s forged deed makes the document invalid as if it had never been recorded.
Liens are documents that are legally attached to a property and serve as a notice that the owner owes a debt to another person. Common examples include child support or “mechanics” liens, which are also known as construction liens and guarantee payment when contractors work on a house.
If liens from a previous owner aren’t found on the title search or released (often a matter of recording a notarized form), the new homeowner could still be legally responsible for the amount owed.
A document may not show up in a search because a name is misspelled, or the legal description is not fully referenced. However, under state law, that missing document can still be tied to your property—meaning you could purchase your home with the previous owner’s open mortgage and be legally obligated to pay for it or risk losing the home.
Since title insurance covers ownership issues that occurred prior to buying the property, these three situations would be covered for the home buyer, and the title insurance company would defend against the challenge or compensate them for any monetary loss of the property.
In many cases, title insurance provides valuable protection and peace of mind for buyers getting ready to own a new home. You can’t always predict what problems might arise, so strong title insurance gives you a plan to face the unexpected without stress.
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